As the cost to keep the door of your business open increases, it’s important to consider whether or not your fee structure is appropriate both for the current times and going forward.
Fees are based on many factors. In addition to your expertise, years of experience, scope of services provided and delivery methods, you will also need to know the cost of delivering your services.
Your income and expenses indicate the ‘actual’ cost of business, versus the return or reward for your effort. Identifying the sources of your income and expenses will also help you make an informed decision regarding your fees. This information should be easily accessible from your accounting records.
In terms of your product lines and income streams, do you know where your income is derived from? How much of your income is defined as upfront and how much is recurring? What will your FSP bank at the end of this year? What level of new income do you need and what will it cost to attain this?
Also consider and think about your personal financial goals. Is your business giving you income in line with your expectations? What would you like to achieve through your business plan?
Regulation and fees
As you evaluate your fee structure, keep in mind that regulation specifies the parameters for FSPs to charge fees. Section 3A (1) of the General Code of Conduct states that FSPs may only receive from or offer to a third party:
- commission authorised under the Long-term Insurance Act, Short-term Insurance Act or Medical Schemes Act.
- fees authorised under the above Acts
- fees for rendering a financial service that does not attract the commission or fees referred to above, if:
- clients specifically agree in writing to the amount, frequency, payment method, recipient of those fees and details of the services that are to be provided for the fees; and
- clients may stop those fees at their discretion;
- fees or remuneration for rendering a service to a third party;
- an immaterial financial interest, subject to any other law; and
- a financial interest not referred to above, for which you have paid a consideration, fair value or remuneration that reasonably aligned with its value at the time of receipt.
Your FSP may only receive or offer the financial interests referred to in points 2, 3, and 4 above if:
- the financial interests are reasonably commensurate with the service being rendered. This takes into account the nature of the service and the resources, skills and competencies reasonably required to perform it;
- payment does not result in you or your representative being remunerated more than once for performing a similar service;
- it mitigates actual or potential conflicts between the interests of clients and the person receiving the financial interests; and
- payment aligns with fair outcomes to clients.
If you are providing services to clients that are not considered advice and intermediary services under the FAIS Act, you can usually charge a fee for these services.
It is also critical that your fee structure reflects the Treating Customers Fairly objectives, particularly Outcome 1. This refers to a culture of fair treatment of clients, which must guide all the business activities of your FSP.
Operating costs
Further, what are the operational costs of providing or offering each of your services? Be sure to factor in ‘time spent’. This reflects the hourly rate of the persons in your business, from the owners and representatives to the administrative staff. There should be a correlation between time spent and income received.
External support costs should also be incorporated in your fees. Examples of such costs are the fees for your App or website through which you provide your services.
Knowing the costs of bringing new clients onboard and rendering services to existing clients, you can apply a segmented approach in respect of costing versus the choice of service without compromising your value proposition.
Once you know where your income is coming from, as well as the full details of your expenses, you can make an informed decision regarding revising your fee structure.
Awareness of your value
FSPs are in the business of selling an intangible product, namely peace of mind. This is not as easy as selling a tangible product such as a car that buyers can drive immediately after parting with their money. However, when a financial product is sold, customer gratification is delayed until a time in the future, such as retirement or when an insured event happens. It is therefore important that clients understand the value you add and have insight into your cost structure.
A great tool to use for this is your disclosure letter. You can use it to explain to clients how difficult it is to obtain and maintain an FSP licence. You could mention that you require a qualification to operate, like a doctor or legal practitioner. In addition to the RE exams, you are required to gain Continuous Professional Development (CPD) hours. You also need Professional Indemnity Insurance to operate. The general public knows little about the advice industry and services and the only way to improve their awareness is to tell them.
Another way to communicate value is through your service level agreements (SLAs) with clients. Your SLAs should clarify what clients can expect from you as well as your responsibility, which is the ideal opportunity to demonstrate the fair treatment of clients.
If you would like more information about setting up a fee structure that sustains your FSP, contact us.